Robert Cargin

Monday, 22 July 2002 09:57

Who’s in charge of your money?

If you’re an investor, you probably work through a financial consultant, someone licensed to recommend specific investments. Many times, a consultant recommends placing funds with a professional money management organization, which will invest the assets for you based on your objectives and tolerance for risk. In these cases, the consultant’s role is to find the money manager best suited to helping you achieve your goals.

Because there are thousands of professional money managers today, finding the one best suited to manage your assets is an enormous challenge. Here are four critical questions to raise when your financial consultant recommends a specific money manager.

What is the money manager’s investment philosophy?

There is a lot to know beyond simply asking whether a money manager buys stocks, bonds, or a combination of both. A good money management firm should be able to articulate its investment style clearly. Ask questions about how they judge whether an investment is suitable for you, how they decide to buy and sell securities, how the firm allocates assets over many types of securities, the source of research data and the risk management procedures.

What do you know about the personnel of this money management organization?

A key role of a consulting firm is to screen the credentials of money managers and other professionals regarding their education, business experience, tenure with the company and other factors. As a whole, the professionals in a money management organization should represent a variety of expertise and depth of experience so the organization’s management style will be consistent over the long term.

How do you verify the long- and short-term performance record of this manager?

Performance measurement is, of course, very important in evaluating a money manager. While short-term performance can be an indicator of developing strengths or weaknesses in a money manager, the better indicator of a manager’s effectiveness is the long-term track record. Ask about yearly and cumulative total returns (yield plus capital gains) for five, seven and 10 years. Ask how the performance compares to an appropriate index of similar investments. And, most of all, ask if the consulting firm conducts an independent verification of the performance reported by the money manager. As you know, past performance is no guarantee of future results.

How well does this money manager communicate with clients?

Clients with managed accounts generally receive regular reports of account activity from their money managers. These statements should be an understandable summary of all investments, listed by asset category, with reports of gains, losses and current market values. The same information should be reported for the entire portfolio. Ask to see a sample report. Good managers also communicate with clients through their financial consultants and sometimes through client newsletters. Ask about a manager’s client communication policy before opening an account.

Robert Cargin is a financial consultant with Smith Barney’s Dublin office. He can be reached at (614) 798-3249.

1. Anticipate you are likely to live a long life and plan accordingly. In fact, according to the U.S. Census Bureau, a woman who reaches age 50 today without serious health problems, statistically can anticipate celebrating her 92nd birthday.

2. There's also a statistically good chance that you'll outlive your spouse. Women, on average, outlive their spouses by about seven years, according to the National Center for Health Statistics. If investing hasn't always been a priority, you should start learning to make it one now.

3. Pay yourself first. By investing systematically over a period of time, instead of paying monthly bills first and then saving whatever is left, you will be surprised how fast your nest egg can grow.

4. Fund your 401(k) or other employer-sponsored program to the maximum. You can build up a good portion of your retirement savings if you contribute as much as you are allowed to into deferred-income plans such as a 401(k). Not only will you reduce your current taxable income, but the tax-deferred compounding feature of these plans allows you to accumulate more than you would in a comparable account that taxes earnings each year.

5. Choose an individual retirement account that's right for you. Compare the projected results of contributing to different types of IRAs and of transferring assets from a traditional IRA to a Roth IRA.

6. Before you switch jobs, check your complete benefits package and the portability and vesting rules of your retirement plan. The U.S. Bureau of Labor Statistics reports that, on average, working women older than age 25 switch jobs every 4.8 years. This job-change frequency often prohibits the growth of retirement plans because vesting requirements are often set at five years.

7. Check on your Social Security benefits. The Social Security Administration reports that 66 percent of retirees rely on Social Security for half or more of their income, with the average monthly payment for women totaling $601. Clearly, Social Security should be thought of as a supplementary income during retirement and not a main source of funds.

8. Beware of being overly conservative in your investments. While there is a correlation between your age and the amount of risk you should assume when investing, being too conservative could seriously erode the value of a retirement account that you may need to rely on for 30 years or more. That's why you should think of retirement as a long-term investment and consider keeping a significant portion of your portfolio invested in stocks as long as possible.

9. Consider long-term-care health insurance. You can't afford to ignore this important insurance need when you consider that the cost of spending a year in a nursing home could run $60,000 or more, according to the Health Insurance Association of America, and could easily deplete your entire retirement reserve.

10. Don't leave everything to Uncle Sam. You owe it to your heirs to establish an appropriate estate plan. Without proper planning, estate taxes (which may range from 37 percent to 60 percent), plus state taxes and income taxes on retirement plan distributions, could reduce your estate by more than 75 percent (if the majority of your assets are in qualified plans and individual retirement accounts). Essentially, your heirs may receive only a fraction of all you've worked so hard to accumulate. SBN

Robert K. Cargin is a financial consultant with Smith Barney's Dublin office.